Group restructuring resulting in share exchange

Background

We were initially approached by the client, a fruit and vegetables retailer and distributor, to assist with restructuring five of their business. Our initial instructions were to establish a group structure through the creation of a holding company. After incorporation, the existing shareholders would be allotted shares in the holding company through a share exchange with their current shareholding in the five companies.

Problem

At the point of instruction, three of the five companies had three individual shareholders. The remaining two companies were held by a fourth individual, in addition to these three core shareholders. Furthermore, the three individuals held shares in varying amounts across each of the five businesses.

We recognised that the existing shareholding proportions increased the complexity of the proposed share exchange.

Under s77 of the Finance Act 1986, to qualify for stamp duty relief, the transfer of the shares must meet certain statutory conditions. These requirements stipulate that the entire shareholding must be transferred to the holding company, and that each shareholder’s interest in the group companies remained identical in value before and after the exchange.

Due to the irregular numbers of shares in each company, the proposed share exchange would have resulted in the holding company shareholding being disproportionate to the initial shareholdings across the group. This would mean that the consideration given and received by each shareholder would not be equal to the number of shares exchanged. Consequently, the client would be unable to benefit from stamp duty relief on the transfer.

Our solution

We advised that the shareholding in the three companies was reorganised prior to the share exchange with the holding company. By issuing new shares to some of the individuals in three of the companies, we were able to ensure that the shareholdings in the holding company was equal to each individual’s shareholding prior to the exchange.

This would enable our client to qualify for stamp duty relief on the transfer, by complying with the statutory conditions.

Once this initial share exchange had taken place, we proposed that a later share exchange would take place, to bring the remaining two companies under the protection of the holding company.